Unaccounted income: To begin from the beginning

The current approach towards unaccounted income overlooks the sources of the unaccounted income.

By Surya Prakash B. S. (@SuryaPrakashBS) and Devika Kher (@DevikaKher)

The focus of the political debate about corruption in India is primarily confined to the unaccounted wealth stashed abroad. The solutions demanded focus on disclosure of assets located outside India and implementation of anti-money laundering laws. Amidst all this, the root cause for the generation of the unaccounted income is being overlooked.

The current approach towards unaccounted income overlooks the sources of unaccounted income. In addition, the various statutes in this area primarily link generation of unaccounted income to the proceeds from criminal activities.

Background

In May 2015, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 was passed with the objective of dealing with the undisclosed foreign income and assets. The Act also has a provision to impose tax on such income and assets.

Before the Black Money Act, 2015, the Prevention of Money Laundering Act, 2002 (PMLA) was in place to curb the problem of money laundering in India. As per the Act, possession of money, and assets generated from crimes like arms, narcotics, immoral trafficking was made punishable with the objective of reducing proceeds from crime. The Act refers to definitions under the Indian Penal Code to define the term ‘crime’. Therefore, reach of the Act is constrained continues to be so even after the new Black Money Act.

Dr. Nigam Nuggehalli, an associate professor at Azim Premji University has looked into the shortcomings of the Black Money Act regulating the unaccounted and undisclosed income. As per Nuggehalli, the Black Money Act provides a lot of discretionary power to the officers in charge and does not serve any purpose above and beyond, what is served in the Income Tax Act, 1961 and the PMLA, 2002. However, there are more generic problems attached to the legislature enacted to reduce the unaccounted income in India.

Shortcomings

The legislature in place currently restricts the scope of ‘black money’ to the income generated through illicit activities or the undisclosed foreign wealth or assets. They completely overlook the instances where illegitimate income is generated while carrying on legitimate businesses.

Based on the data collected from I Paid A Bribe, an online platform to report corrupt activities, some education institutions collect Rs. 20,000 to Rs. 1,00,000 as bribes for admissions. For services like ensuring passport verification or getting passport renewed, the market price estimated for the bribe is Rs. 200- Rs. 10,000. The closest that PMLA, 2002 gets to addressing such instances is by declaring ‘public servants taking gratification other than legal remuneration’ as a crime. Even then it does not looks at the root causes behind the rise of the undisclosed income like the transaction cost and the principal agent problem.

The scope for corruption primarily exists due to the cumbersome processes and the ambiguous regulations set by the administrative authorities. An increase in the time and the money spent on completing the process makes the illegitimate methods look economically rational in comparison. In certain situations the corrupt practices are also used due to the principal agent problem. The provisioners exploit the opportunity to extract benefits from the customers, as the service provided is in the interest of the customer and do not affect the provisioner. For instance, a process like ensuring passport renewal is only in the interest of the passport holder. Hence, the passport authorities use this chance to gain extra benefits.

To sum up, a close scrutiny of both the generation and the flow of unaccounted income are needed. Addressing the root cause behind unaccounted income generation requires an in-depth analysis of the sectors prone to malpractices. This analysis will help to better understand the environment that facilitates and necessitates such behaviour.

We hope to explore in further detail these aspects over the next few blogs.

Surya Prakash B. S. is a research scholar at The Takshashila Institution. His twitter handle is @SuryaPrakashBS

Devika Kher is a Research Associate at Takshashila Institution. Her twitter handle is @DevikaKher.